New York regulators are aiming to strengthen policyholder protection governance of private equity and other acquisitions of insurance companies, especially annuity companies.
The deals have been a source of much controversy in the annuity business in the past few years, due to concerns that the short-term business model of private equity might clash with the long-term model of insurance companies and the long-term needs of annuity owners.
In a new set of regulations released last week, the New York Department of Financial Services proposed rules that would heighten transparency, disclosure, and financial standards in such deals in the state of New York. According to the department, the regulations call for:
Stronger disclosure and transparency requirements. They require the acquirer to disclose to the department necessary information concerning its corporate structure, control persons and other information regarding its operations.
Enhanced regulatory scrutiny of operations, dividends, investments, reinsurance. This requires that any material changes to plans of operations within five years of the acquisition, including investments, dividends or reinsurance transactions, have the prior department approval.
Increased financial accountability: This stipulates that, if the acquirer’s plan of operations changes, the department may obligate the acquirer to provide additional capital if determined necessary.
Model for the agreements
The proposed regulations are modeled on agreements the department reached last year on policyholder protections with three investment firms — Guggenheim, Apollo and Harbinger — related to purchases of New York-based annuity companies.
In 2013, Guggenheim Partners, through its Delaware Life Holdings affiliate, bought Sun Life Insurance and Annuity Co. of New York; Apollo Global Management, through its Athene Holding Ltd. affiliate, bought Aviva Life and Annuity Co. of New York. In 2011, Harbinger Group, through its Harbinger Capital Partners affiliate, bought Fidelity & Guaranty Life Insurance Co. of New York (actually the New York business of Old Mutual U.S. Life Holdings, but the name was immediately changed).
In the case of Guggenheim and Apollo, the department made its approval of their respective acquisitions conditional upon the companies signing a consumer protection agreement drafted by the department. In the case of Harbinger, Fidelity & Guarantee signed the agreement as part of another action taken last year by the department restricting Harbinger’s control over the carrier.
Scope of ownership
The department statement announcing the new regulations identifies all three purchasers as “investment firms.” But the commentary about the regulations themselves indicate that the new rules would apply to “private equity and other investment firms.”
This indicates that the department has broadened, or perhaps made clear, the scope of ownership to which its proposed regulations would apply. It’s not just private equity firms but also private-equity-related ownership, including investment firms with private equity affiliates or units.
No doubt, this is a reflection of the multi-level structures that exist at some potential buyers of insurance companies.
Last year, when the department began looking into the issue, the regulators zeroed in on “private equity firms” buying or controlling insurance companies, particularly annuity companies. Department Superintendent Benjamin M. Lawsky warned that “a very rapid growth in market share” had already occurred. The concern, he said at the time, is that private equity firms “may not be long term players in the insurance industry and their short-term focus may result in an incentive to increase investment risk and leverage in order to boost short-term returns.”
The department later subpoenaed six such firms to come in and talk to the regulators about their existing or potential interest in insurance company ownership and to learn more about how their firms operate. Some of those firms at the time called InsuranceNewsNet to say they do not consider themselves to be private equity companies due to particulars of their corporate structure — not even if their parent company has a private equity affiliate doing the acquisitions.
No doubt, the firms made the same argument with the department. The result seems to be that the proposed regulations include various types of potential insurance company acquirers that are sometimes associated with private equity deals, not just “private equity firms.” For example, see the underlined words in Note B of the proposed fifth amendment to Regulation 52 (the holding company regulation in New York); the underlining reflects additions to the existing regulation that the department is proposing.
The proposed amendment’s requirement for a five-year period in the ownership arrangements also references the ownership types mentioned in Note B. Here is a small portion of that the five-year discussion:
In a regulatory impact statement on proposed changes to Regulation 52, the department pointed out that private equity firms are generally organized as limited liability companies, limited partnerships or limited liability partnerships. However, they also “often create acquisition vehicles (also in the form of limited liability companies or partnerships) for particular transactions within a short time prior to the proposed acquisition (typically, within three years).”
Because such corporate forms were not as common or were not statutorily authorized when Regulation 52 first came out, the department continued, they were not explicitly referenced in the rule. However, the department has been considering them to be included in the term "other similar entity" in the current rule.
Under the new regulations, if they are adopted, those various corporate forms would be explicitly stated.
Seeing a balance
Lawsky, in announcing the proposals, said: “We’re seeking to strike an appropriate balance that keeps markets open to new entrants, while at the same time putting in place necessary safeguards.”
In a speech he gave in April last year, Lawsky broached the idea of modernizing regulations “to deal with this emerging trend to protect retirees and to protect the financial system.” He intimated that this is what New York might do. Then he said, “We hope that other regulators will soon follow suit.”
New York does have a lot of influence in state regulatory trends. However, it is not clear that other state regulators will take up this particular issue in the form of new regulations. The National Association of Insurance Commissioners (NAIC) does have a working group on private equity issues in the Financial Condition E Committee. But the group’s charge for 2014 says nothing about developing regulations.
Instead, the working group’s charge is “to consider development of procedures that regulators can use when considering ways to mitigate or monitor risks associated with private equity/hedge fund ownership or control of insurance company assets, including the development of best practices and consideration of possible changes in NAIC policy positions as deemed appropriate.”
The full set of materials related to proposed changes to Regulation 52 (as well as other proposed regulations) can be viewed here. The publication date for the Regulation 52 amendments was May 14, 2014, with a public comment period ending after 45 days. No hearing has been scheduled.
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